China Funds Seen as Best Bet to Avert Russia Gold Mining Decline

• Russian gold output seen almost flat in 2016, gold union says
• Additional investment is needed to support output after 2017

Chinese investors may be one of Russia's best chances to keep the world’s second-largest gold production from heading into a decline, the head of Russian industry lobby said.

Russian producers' spending has dried up since 2012 as gold prices slumped, leaving production of the precious metal almost flat next year and threatening a decline in 2017, Sergey Kashuba, head of the Union of Gold Producers of Russia, said in an interview.

Russia can offer high ore grades to China, as the world's biggest producer and buyer of gold faces rapidly depleting deposits after a jump in output, he said.

Mining companies in Russia are choosing between spending on future output and borrowing at higher cost after the U.S. and Europe imposed sanctions on the country’s financial industry even as the ruble’s collapse last year lowered production costs. China's gold production soared more than fivefold in the decade starting from 2004, while its current reserve base can’t support output levels, the World Gold Council said last year.

“Chinese money may soon appear in Russian gold mining,” Kashuba said. “Chinese gold miners have skimmed off the cream at home so today they’re looking at Russia with interest. They recognize that the ruble devaluation has made mining in Russia more attractive.”

The first Chinese acquisitions of gold assets in Russia or creation of joint ventures with local producers is possible next year as due diligence has already started, Kashuba said, without elaborating.

Polyus Gold OJSC is the biggest Russian producer to say it's holding discussions to bring Chinese partners into the Natalka project in the east. Talks with China National Gold and others are continuing, the mining company's press service said on Tuesday.

In addition to Chinese investments, the start of Natalka or the Sukhoi Log deposit in Siberia, one of the world’s 10 largest deposits, may help sustain Russian gold output, Kashuba said. The government has been planning to sell Sukhoi Log for more than a decade.

Kashuba also called for Russian miners to set up “hubs” to process gold mined by multiple producers, develop deposits with more difficult ores and boost underground mining, which is still rare in the country.

Russian gold mining reached a record in 2014 after growing by 6 percent to 8 percent annually for several years. This year, output will rise by 1 percent to 239 metric tons, while total production, including metal refined from scrap, will reach 290 tons, Kashuba said. Output next year will probably be flat or may rise 1 percent, he said. (Andrey Lemeshko, Yuliya Fedorinova)